Comcast Corp. (CMCSA:US)’s proposed purchase of Time Warner Cable Inc. (TWC:US) goes before U.S. regulators who probably will approve the deal after securing pledges the combined company won’t harm Internet users.
U.S. Federal Communications Commission Chairman Tom Wheeler, a Democrat, may seek to protect online video providers like Netflix Inc. (NFLX:US) from excessive charges for streaming content and use the deal to extend fast Web access to more residences and schools.
“I think it gets through because it enables the Wheeler FCC to implement public policy that it might not be able to get done through rulemaking,” Rob McDowell, a former Republican commissioner, said in an interview.
Comcast doesn’t compete head-to-head for cable-TV subscribers with New York-based Time Warner Cable because they have different franchise areas. Their competition is for national suppliers of video service and high-speed Internet, or broadband, such as AT&T Inc. (T:US), Verizon Communications Inc. (VZ:US) and satellite providers such as Dish Network Corp. and DirecTV.
The traditional antitrust review looking at whether a merger creates too much market concentration may take a back seat to negotiations centering on how Internet traffic and online video will be handled, Paul Glenchur, Washington-based senior analyst with Potomac Research Group, said in a note today.
Buying the second-largest U.S cable-TV company extends Philadelphia-based Comcast’s leadership in the industry, giving it access to the New York City cable market and more bargaining power with content providers, said Bill Smead, chief investment officer at Smead Capital Management.
Time Warner Cable jumped 7 percent to $144.81 at the close in New York, while Comcast fell 4.1 percent to $52.97.
Increased national market share won’t give Comcast more clout over program providers, David Cohen, Comcast executive vice president, said in a conference call today.
“I’m going to make the argument to them, you guys can be calm,” he said. “This is not going to have a dramatic impact on our ability to negotiate with you.”
Comcast said it is willing to give up 3 million of the approximately 11 million subscribers the deal would bring. That would keep the combined company below a threshold U.S. regulators once set of making sure no cable company served more than 30 percent of the pay-television market, Cohen said. A court in 2009, ruling on a lawsuit brought by Comcast, threw the regulation out.
“We are not going to be depriving a single customer of a choice that he or she has today,” Cohen said.
Together, Comcast and Time Warner will have about 30 million subscribers after divestitures, Comcast said in a fact sheet on the deal.
At the end of 2013, AT&T had 21.9 million subscribers for video and broadband, and Verizon had 14.3 million, according to data compiled by Bloomberg Industries that excludes wireless customers. The two largest telephone companies also had 49.6 million subscribers to voice services, according to the data.
House and Senate lawmakers said they would hold hearings.
Representatives Bob Goodlatte, a Virginia Republican who is chairman of the House Judiciary Committee, and Spencer Bachus, the Alabama Republican who is the antitrust subcommittee chairman, said in an e-mailed statement the merger “could have a significant impact on competition.” A hearing would help ensure that consumers and competition are protected, they said. They didn’t provide a hearing date.
Separately, Senator Amy Klobuchar, the Minnesota Democrat and chairwoman of the Senate’s antitrust subcommittee, said she planned to “carefully scrutinize” the deal in a hearing. She also didn’t provide a date.
Consumer groups said they would oppose the $45.2 billion deal.
“This will mean more consolidation and more control over what people see on the TV and the Internet,” said Matt Wood, policy director of Free Press, a public interest advocacy group that opposes the deal.
Michael Copps, a former Democratic FCC commissioner, in a statement released by Common Cause said the deal “is so over the top that it ought to be dead on arrival at the FCC.”
The deal may face “raw political pushback from cable critics and possibly rivals” who would argue it goes too far and needs to be reined in, Stifel Nicolaus & Co. analysts Christopher King and Josh James said in a note today. “But we ultimately expect the transaction will be approved.”
Comcast probably will need to make some divestitures and agree to conditions like those it accepted when it bought NBC Universal in 2011, the Stifel analysts said.
As part of that deal, Comcast agreed to follow the FCC’s open-Internet rules, which required service providers to treat Web content equally, until 2018 regardless of how the regulations fared before judges. An appeals court vacated the rules last month, and Wheeler is considering how to respond.
With a merger the rules would extend to the acquired Time Warner broadband subscribers, Comcast’s Cohen said.
FCC spokeswoman Shannon Gilson declined to comment.
Washington hasn’t judged a major cable merger since the FCC and Federal Trade Commission in 2006 let Comcast and Time Warner buy assets of bankrupt Adelphia Communications Corp. The FCC required the buyers to offer regional sports programs to competitors.
The FCC has singled out regional sports networks for attention while judging cable deals, saying that withholding coverage of games and events may be anti-competitive. Time Warner has regional sports networks in Los Angeles that show Lakers basketball and Dodgers baseball games.
The FCC should block the merger because it creates a company with too much power over Internet traffic, Harold Feld, senior vice president of the Washington-based policy group Public Knowledge, said in an interview.
“The smart money never bets against Comcast, but at this point I’m not sure I’d bet on Comcast either,” Feld said.
Questions for the FCC include whether Comcast unfairly charges more to middle-mile Web carriers such as Level 3 Communications Inc. (LVLT:US) and Cogent Communications Group Inc. (CCOI:US) because they carry traffic for competing video provider Netflix, Feld said.
Cohen, the Comcast executive, said such disputes have been successfully resolved in company-to-company negotiations.
Consumers Union, the non-profit publisher of Consumer Reports magazine, announced its opposition.
“This industry is notoriously unpopular with consumers due to poor customer service, not to mention ever-increasing bills, and a deal this size doesn’t exactly convince us that things will get better.” Delara Derakhshani, policy counsel for Consumers Union, said in an e-mailed statement.
Comcast isn’t guaranteeing the merger will bring down customer bills, “or even that they’re going to increase less rapidly,” Cohen said in the conference call. Consumers will benefit from better quality of service and innovation, he said.
Cable company mergers generally create efficiencies and reduce costs because they permit programming distribution over a wider subscriber base, Herbert Hovenkamp, a law professor at the University of Iowa, said in an interview.
Antitrust enforcers will have to decide “whether there is a significant group of customers who would be expected to pay higher prices or have reduced services,” Hovenkamp said.
The Justice Department probably will review the deal because it handled Comcast’s transaction with NBC, said Maurice Stucke, a lawyer at GeyerGorey LLP and a law professor at the University of Tennessee. The Federal Trade Commission shares antitrust duties.
“This deal can be enjoined if it gives too much clout to Comcast-Time Warner as a purchasing entity even though consumers may be unaffected,” he said.
Justice Department spokeswoman Gina Talamona declined to comment on the deal.
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